NORTH SEA
MEMORANDUM
INDIRECT TAX ADVICE FOR COMPANIES
OPERATING IN THE UK OIL AND GAS SECTOR
Published by the United Kingdom Oil Industry Tax Committee - Indirect Taxes Committee
CONTENTS
Contents ………………………………………………………………………………....(i)-(v)
Appendices………………………………………………………………………………... (vi)
Key Changes……………………………………………………………………………….(vii)
Introduction...... (viii)
Glossary of Terms ...... (ix)-(xv)
PART IUPSTREAM OIL AND GAS BUSINESS ...... 1
1. GENERAL BACKGROUND INFORMATION...... 1
PART IIOFFSHORE EXPLORATION AND EXPLOITATION ...... 3
2.THE SUPPLY CHAIN...... 3
3.GLOBAL CHARGE FOR MONTHLY INVOICES ...... 3
4.UNITISATION...... 4
5.VAT REGISTRATION ...... 6
6.DEDUCTION OF INPUT TAX INCURRED ON GOODS AND SERVICES PRIOR
TO REGISTRATION ...... 7
7.PLACE OF SUPPLY ...... 7
8.LIABILITY OF PRINCIPAL SUPPLIES AND IMPORTS...... …... 10
8.1Exploration and Production Charges ...... 10
8.2Pipeline Transportation and Maintenance ...... 11
8.3Tariff Receipts ...... 12
8.4On Shore Terminals - Storage, Handling and Processing ...... 12
8.5Import - General ...... 14
8.6Gas Imports ...... 14
8.6.1Liquid Petroleum Gas (LPG's)...... 15
8.6.2Natural Gas Liquids (NGL's) ...... 16
8.6.3Liquefied Natural Gas (LNG)………………………………………. 16
8.6.4Condensate …………………………………………………………. 16
8.7 Crude Imports ...... 17
8.8Goods Returned from the Continental Shelf...... 17
9.SUPPLIES TO OMS FROM THIRD PARTY CONTRACTORS...... 17
9.1Rigs and Platforms (Fixed)...... 17
9.2Rigs and Platforms (Mobile/Floating)...... 20
9.3Construction of Pipelines, Shore Terminals and Tank Farms ...... 20
9.4Repair and Maintenance of Pipelines and Platforms...... 21
9.5Repair and Maintenance of Equipment...... 22
9.6Leases of Plant and Equipment...... 23
9.7Leases of Means of Transport Including Pipelines...... 23
9.8Telecommunication Services...... 24
9.9Catering...... 24
9.10Agency Staff...... 25
9.11 Supply of Oils for Drilling ( Tied Oils) ……………………………………25
9.12Other Services...... 26
PART IIIONSHORE EXPLORATION AND EXPLOITATION...... 27
10.GENERAL INFORMATION...... 27
10.1Liability of Exploration and Production Billings...... 27
10.2 Supplies by Third Party Contractors………………………………………..27
11.ENVIRONMENTAL TAXES……………………………………………………… 28
11.1 Climate Change Levy ...... 28
11. 2 Aggregates Levy ………………………………………………………….....30
12. INSURANCE PREMIUM TAX……………………………………………………. 30
PART IVDISPOSAL AND REARRANGMENT OF LICENCE INTERESTS AND FINANCING AGREEMENTS
13.INTRODUCTION...... 32
14.THE LICENCE...... 32
15.MAIN METHODS OF REARRANGING THE LICENCE...... 32
16.SALE OR ASSIGNMENT...... 33
17.FARM-OUT OR EARN-IN...... 33
18.DEFERRED PAYMENTS………………………………………………………… 34
18.1Over-riding Royalty Interest Retained...... 34
18.2Granting of a Net Profits Interest...... 34
18.3Production Payments...... 34
19.LIABILITY OF REARRANGEMENT OF LICENCE INTERESTS...... 35
19.1Introduction...... 35
19.2Transfer of a Going Concern (TOGC)...... 35
19.3Non-TOGC...... 36
20.CONSIDERATION FOR SUPPLIES NOT INVOLVING A TOGC...... 37
21.SEPARATE SUPPLIES OF GOODS OR INTERESTS IN GOODS...... 38
PART VWAREHOUSING...... 39
22.GENERAL INFORMATION...... 39
22.1Crude Oil...... 40
22.2Liquid Petroleum Gas (LPG)...... 40
22.3Gas Imports...... 41
23.PROCESSING AND OTHER SERVICES IN WAREHOUSE...... 41
24.VAT ACCOUNTING PROCEDURES...... 42
24.1Payment of VAT...... 42
24.2 Evidence for Input Tax ...... 43
25.HOME PRODUCED OIL...... 43
26.IMPORTS OF FINISHED PRODUCTS...... 44
27.TAX POINT: FOURTEENTH DAY ARRANGEMENT...... 45
28.VALUATION FOR VAT PURPOSES...... 46
PART VIIMPORTATION INTO THE UK OF GOODS FROM OUTSIDE THE
EU FOR USE OFFSHORE - SHIPWORK END USE RELIEF - (SWEU)
29.GENERAL INFORMATION...... 48
29.1Eligible Goods and Prescribed Uses ...... 48
29.2Processes Allowed on SWEU Goods ...... 49
29.3What are Qualifying Platforms/Workpoints ...... 49
29.4SWEU & Evidence Required ...... 50
29.5Time Limit for Completing SWEU & Repeated Use Goods ...... 50
29.6Transfer of SWEU Goods ...... 51
29.7Record Keeping ...... 51
PART VIIDECOMMISSIONING OF RIGS AND PLATFORMS IN THE UKCS
30GENERAL INFORMATION...... 52
30.1Customs Reliefs for Customs Duty & Import VAT ...... 52
30.2Rigs/Platforms Imported Entire ...... 53
30.3Goods Returned to the UK from the UKCS ...... 54
30.3.1Discharge of SWEU ...... 54
30.3.2Reimportation to SWEU...... 54
30.3.3Importation to RGR ...... 54
30.3.4Importation as Scrap ...... 54
30.4Valuation of Goods for Duty Purposes...... 54
PART VIII INTRA-EU STATISTICAL REPORTING REQUIREMENTS
31GENERAL INFORMATION …………………………………………………. 55
31.1 Hydrocarbon products …………………………………………………… 55
31.2 Other material movements ………………………………………………. 56
APPENDICES
APPENDIX A SUMMARY OF TAX TREATMENT FOR FOLLOWING SUPPLIES
- IMPORT AND ACQUISITION OF OILS, NGL’s & LPG's
- GOODS SOLD IN AN EXCISE WAREHOUSE
- SUPPLIES OF GOODS AND SERVICES BY OPERATING
MEMBER AND THIRD PARTIES
APPENDIX B VAT ON IMPORTED GAS
APPENDIX C SPECIAL ARRANGEMENTS FOR WAREHOUSING LPG AT
KILLINGHOLME
APPENDIX D VAT - SUPPLIES RELATING TO SEISMIC DATA
APPENDIX E CUSTOMS DUTY REGULATIONS FOR GOODS IMPORTED FOR USE OFFSHORE
APPENDIX F TYPES OF WAREHOUSE
APPENDIX GPROCUREMENT AND DISTRIBUTION OF OIL PRODUCTS
UNDER THE TIED OILS SCHEME
APPENDIX H INTRASTAT – MATRIX
KEY CHANGES AND UPDATES
The North Sea Memorandum has been extensively revised from the previous March 2007 edition. Whilst changes have been made in many areas of this document, we consider the most significant amendments to be in the following sections:
Glossary – EORI and AEO reference - NEW
Section 7 – Place of Supply of Services
Section 9 - Temporary Agency Workers
Section 19 – Liability of Rearrangement of Licence Interests
Appendix B – Gas Imports
Appendix H – Intrastat Matrix - NEW
POTENTIAL CHANGES AND UPDATES
Place of Supply of Services– “VAT Package” Changes
This revised version does not include the forthcoming changes to the place of supply of services which will came into effect with the implementation of the EU VAT package on 1st January 2010. Amendments will be required in various sections of the North Sea Memorandum to reflect the changes to the place of supply of services regulations and UKOITC-ITC is currently working with HMRC to draft and agree the appropriate changes for incorporation into an updated version of the North Sea Memorandum. In the meantime, you should consult HMRC’s published guidance, Notice 741A, “Place of Supply of Services” as the primary source of information on the subject.
VAT Treatment of Gas Imports
Amendments will be required to the North Sea Memorandum to reflect the potential changes to the VAT liability of gas imports which may take place in 2010. UKOITC-ITC will work with HMRC to draft and agree the appropriate changes for incorporation into an updated version of the North Sea Memorandum as soon as practicably possible after the date of any changes in UK VAT legislation with regard to the VAT treatment of gas imports. In the meantime the guidelines in Section 8.6 and Appendix B of this document should be followed.
Warehousing Issues
This revised version does not include current and forthcoming changes in respect of Warehousing, including Special Energy Products, Warehousekeeper’s responsibilities and Flange Trading. These will be incorporated in due course and in the meantime, you should consult HMRC’s published guidance.
INTRODUCTION
The primary purpose of the North Sea Memorandum is to provide indirect tax guidance in respect of the supply of goods and services associated with UK oil and gas exploration and production. This Memorandum has been prepared to supplement HM Revenue & Customs’ published guidance, which is not designed to comprehensively cover all aspects of this specialist and complex industry.
This document has been reviewed by representatives of HMRC who have also assisted in its preparation. However, it is not an official HMRC publication but rather represents UKOITC-ITC’s understanding of the relevant law and practice as at the date of publication. It should be made clear that, where the views expressed herein are subsequently overtaken by a change of law, the decision of a tribunal or court, the up-dating of an official publication, or where there remains any doubt as to the correct VAT treatment of a supply, members are advised to consult HMRC’s National Advice Centre.
UKOITC-ITC have been advised by HMRC that, should one of their Officers disagree with any interpretation contained in the Memorandum, the Officer should be asked to consult the Oils Unit of Expertise before taking any action.
Unless indicated otherwise, the references in this Memorandum are to the Value Added Tax Act 1994 (VATA).
Contributors to the North Sea Memorandum include UKOITC-ITC, CW Energy Tax Consultants Ltd and HMRC. Neither these parties nor the individual member companies of UKOITC-ITC can be held responsible for any errors or omissions in this document.
GLOSSARY OF TERMS
AEO
Authorised Economic Operator. HMRC Notice 117 provides further information.
Consortium
A joint venture between a group of independent unrelated companies. Each member separately owns interests in a licence and operates under a JOA.
Condensate
Condensate is a by-product of the processing of natural gas. Condensate is typically composed of pentane and other heavier hydrocarbon fractions left in the NGL stream after removal of propane, butane and ethane. Condensate can be refined as if it were very light crude oil.
Crude Oil
A mixture of hydrocarbons that exist as liquids in natural underground reservoirs. Crude is the raw material that is refined into gasoline, diesel, heating oil, jet fuel, LPG, petrochemicals, and other products.
Customs
H M Revenue and Customs - formed by the merger of H M Customs and Excise and the Inland Revenue.
Customs warehouse
A system or place authorised by HMRC for the storage of non-community goods under duty and import VAT suspension.
Dry Gas
Natural gas which occurs in the absence of condensate or liquid hydrocarbons, or gas that has had liquid or condensable hydrocarbons removed. Dry Gas is largely methane and can usually be fed directly into the National Transmission System (“NTS”) following small temperature and pressure adjustments.
Dutiable Goods
Goods of a class or description subject to any duty of customs or excise, whether or not those goods are in fact chargeable with that duty and whether or not that duty has been paid.
Earn-in
Similar to a farm-in but the licence is not acquired until the consideration has been settled, usually by undertaking works in the licence area.
EORI
A new trader identification system was introduced throughout the EU on 1st July 2009 called the Economic Operator Registration and Identification (EORI). Economic operators involved in the import, export or transit or 3rd country goods require an EORI number for identification in communications with any EU Customs authority. The EORI number replaces the Trader Unique Reference Number (TURN) system in the UK and is in the same format, GBXXXXXXXXXXXX.
Farm-in
The acquisition of a licence for a consideration which, usually, is satisfied by an obligation to bear future costs connected with the licence, although the consideration can take many forms, including cash.
Farm-out
The assignment of part of a licence in consideration for the person farming or drilling one or more wells or incurring specified development and operating costs.
HMRC
HM Revenue & Customs.
Joint Operating Agreement (JOA)
An agreement between members of a consortium under which they agree to share the costs of exploration and development of a field and the production there-from, in proportion to their respective percentage interests. The term also relates to agreements in connection with the ownership, construction and development of pipelines and shore installations. It is not a partnership.
Licence
A licence for the exploration for and production of petroleum in force at any time under the Continental Shelf Act 1964, the Petroleum (Production) Act (Northern Ireland) 1964 or the Petroleum Act 1998.
LPG
Liquefied Petroleum Gas (“LPG") typically contains a mixture of propane and butane derived from crude oil refining or natural gas fractionation. For convenience of transportation, LPG is liquefied through pressurisation and sometimes temperature reduction.
Liquefied Natural Gas (LNG)
Natural gas that has been liquefied for ease of transport by cooling the gas to -162ºC. Natural gas in its gaseous form has 600 times the volume of LNG.
Natural Gas
A naturally occurringmixture ofhydrocarbon gases composed mainly of methanetogetherwithvarying quantities of other gasesincluding ethane, propane, butaneandcondensate. Theconstituent proportions can vary significantly between sources and the termcan beused to describe naturally occurring wet gas, dry gas, or national transmission system quality gas.In the downstream supply industry the term natural gas is generally assumed to refer to that which is supplied through the NTS (i.e. predominantly methane). Care is therefore necessary when using this term.
Natural Gas Liquids (NGL’s)
A collective term used for liquid products separated from natural gas in a gas processing plant. NGLs include propane, butane, ethane, and condensate. NGL’s can be LPG or condensate rich depending on the origin of the wet gas stream.
National Transmission System – “NTS”
The gas National Transmission System (“NTS”) is owned and operated by the National Grid. The NTS is the “motorway” of the gas network infrastructure. Gas is delivered to seven reception points in the UK (called beach terminals) by gas producers operating offshore facilities. NTS pipelines carry gas from the seven beach terminals around Great Britain. The NTS is the high-pressure part of the National Grid's transmission system. The gas is pushed through the system using 26 strategically placed compressor stations. From over 140 off-take points, the NTS supplies gas to power stations, a small number of large industrial consumers and the twelve Local Distribution Zones (LDZs) that contain pipes operating at lower pressure, which eventually supply consumers.
Operating Member (OM)
The member of a consortium, usually the member with the greatest percentage interest, responsible for carrying out the exploration, development and production activities on behalf of the other partners under a Joint Operating Agreement (JOA).
Overseas Trader
An overseas participating member who for the purposes of a particular supply, is established outside the UK.
Participating Member (PM)
A member of an exploration, development or production consortium other than the OM.
Petroleum
Petroleum is defined in Section 1 of the Petroleum Act 1998 to include any mineral oil or hydrocarbon and natural gas existing in a natural condition in strata, but excluding coal, bituminous shales or similar materials.
POSSO
The VAT (Place of Supply of Services) Order 1992 - Statutory Instrument 1992/3121.
Producer's Premises
The premises, plant, pipes and vessels situated onshore or within UK territorial waters (including a drilling well) described on an excise entry in accordance with the Customs and Excise Management Act 1979 Section 108 & 109 and Reg. 3 of the Hydrocarbon Oil Regulations 1973 - Statutory Instrument 1973/1311, where oil may be stored without payment of excise duty if:
1.oil is obtained from any substance or natural source,
2.one description of oil is obtained from another, or
3.oil is subjected to any process of purification or blending.
Tax Warehouse
A place of security in the UK or IOM approved by the Commissioners of HMRC for the treatment of oil, where goods may be warehoused without payment of any duty of excise chargeable thereon. Ref: Customs and Excise Management Act 1979, Section 92(1).
SPO
The VAT (Special Provisions) Order 1995 - Statutory Instrument 1995/ 1268.
Taxable
Goods or services subject to Value Added Tax at the standard rate, the reduced rate or the zero rate.
Tariff receipts
Consideration received by a participator in an oil field in respect of the use of an asset connected with that field.
Twelve-mile limit
The breadth of the territorial sea adjacent to the UK over which the UK enjoys sovereignty. Also known as “UK Territorial Waters”, it is equal to 12 nautical miles, as defined in the Territorial Sea Act 1987. This Act increased the limit from 3 nautical miles, and came into force on 1st October 1987. Note: a nautical mile is defined as 1,852 metres.
UK Continental Shelf (UKCS)
The areas which, following the 1958 Geneva Continental Shelf Convention, were vested in the Crown by the Continental Shelf Act 1964 and which are defined there-in as “designated areas”. These are subject to the adjustments agreed in subsequent bilateral agreements regarding trans-median areas. It excludes UK Territorial Waters.
UKOITC
United Kingdom Oil Industry Taxation Committee.
U.K. Territorial Waters
See “Twelve-Mile Limit”.
VATA
The Value Added Tax Act 1994.
Warehousing Regime
The VAT treatment applied to supplies of goods or supplies of associated storage services or processing of those goods when such goods are subject to a warehousing regime, is contained within VATA, Sections 18 and 18C respectively. The scope of the warehousing regime in respect of hydrocarbon oils is such that oil and gas remain subject to such a regime when moving from a UK warehouse to a tax warehouse in another Member State. One practical effect of this is to treat all supplies of goods that occur at any time during such a movement as outside the scope of UK VAT. In the case of oils for export to a non-EU destination, the scope of the warehouse regime ends when the goods physically leave the warehouse. The final supply of the goods for export is zero-rated, subject to conditions being met - see HMRC Notice 703 Export of goods from the United Kingdom. Where oil products or LPG leave the UK tax warehouse where they are initially held, they cannot normally be transferred to another tax warehouse in the UK within the warehousing regime.
Wet Gas
This is naturally occurring gas. The chief constituent is methane but there are significant proportions of other liquid hydrocarbons including LPGs, condensate and other non-combustible gases such as nitrogen. The constituent proportions vary from source to source. Where the methane content is greater than 85% this is generally referred to as “dry gas” even if further processing to remove NGL’s is required.
1
UKOITC-ITC, February 2010
PART I UPSTREAM OIL AND GAS BUSINESS
1.GENERAL BACKGROUND INFORMATION
For both onshore and offshore oil and gas exploration/exploitation purposes, a specified area is licensed, often to a consortium of companies. One of the participating companies in a consortium usually acts as "the operating member" (OM) under what is known as a Joint Operating Agreement (JOA). The other members of the consortium are referred to in this Memorandum as "participating members" (PM's). The Operator buys in goods and services and either carries out, or commissions, the necessary work, such as drilling and well-head construction. Each participating company normally contributes towards the cost of these operations according to its percentage share of the licence interest. Likewise, if oil or gas is discovered, each participating company is usually entitled to that percentage share of any oil or gas that is recovered.
A licence is granted by the Secretary of State under the terms of regulations made under Section 4 of the Petroleum Act 1998, as extended by the Continental Shelf Act 1964 to petroleum in situ in the seabed and subsoil of the continental shelf outside UK territorial waters, broadly the twelve-mile limit. The most recent regulations are The Petroleum Licensing (Exploration and Production) (Seaward and Landward Areas) Regulations 2004, Statutory Instrument 2004/352. Earlier licensing rounds would have been covered by a series of different regulations. The regulations make a distinction between landward and seaward areas. Broadly, landward areas reach as far as the low water mark but also include river estuaries and certain partly enclosed waters, such as The Solent and The Wash and the waters between the Outer Hebrides and the west coast of Scotland. Seaward areas lie outside the landward areas and include the remainder of the territorial sea together with designated areas. For licensing purposes, the seaward areas are divided into "blocks" formed by lines running east-west at intervals of 10 minutes of latitude and north-south at intervals of 12 minutes of longitude, producing an area of between 200 and 250 square kilometres per block.